Series 7 (prac test 6/1)

A confirmation of each customer trade must be given or sent A) on or before the settlement date. B) before the settlement date. C) on the trade date. D) before the trade date.

A Explanation A confirmation must be sent to a customer on or before the completion of the transaction (the settlement date).

Which of the following statements regarding a municipal variable-rate demand obligation are true? Interest payments are tied to the movements of another specified interest rate. Interest payments are tied to the movements of an underlying stock or index. The coupon rate stays the same for the life of the demand obligation, and the price fluctuates. The coupon rate of the bond changes, and the price remains stable. A) I and IV B) II and III C) II and IV D) I and III

A Explanation A municipal variable rate demand obligation has interest payments tied to the movements of a specified interest rate. Because the coupon rate of the bond changes with the market, the price of the demand obligation tends to remain stable.

If a chart indicates that both the Dow Jones Industrial Average and the advance/decline line have been increasing since January, and the advance/decline line continues to rise, the market should A) continue to rise. B) not change. C) turn down sharply. D) turn down moderately.

A Explanation A rising advance/decline line indicates that more stocks are rising in price than falling. A rising advance/decline line is a bullish indicator.

Last week one of your customers placed a good-til-canceled order to sell 200 shares of ABC with an 18 stop when the stock was trading at $18.85. It is now the ex-date for a $0.55 dividend and the order has not yet been executed. What has happened to your customer's stop order? A) It is reduced to $17.45. B) It remains at $18. C) It is increased to $18.55. D) It is canceled.

A Explanation Unless the customer has given DNR (do not reduce) instructions, open buy limit orders and open sell stop orders are reduced on the ex-dividend date by the amount of the dividend.

An investor anticipating a rise in interest rates would likely purchase A) variable-rate demand obligations or reset bonds. B) corporate bonds. C) bonds issued by the U.S. Treasury. D) callable bonds.

A Explanation Variable-rate or reset bonds have coupons that are adjusted based on the movements of other specified interest rates. A callable bond works to the issuer's advantage when interest rates fall but offers no added benefit to an investor when interest rates rise. Generic corporate or government-issued bonds offer no advantage for an investor anticipating a rise in interest rates.

A A city's day-to-day operational expenses may be met by the issuance of A) tax anticipation notes (TANs). B) credit-linked notes (CLNs). C) bond anticipation notes (BANs). D) grant anticipation notes (GANs).

A Explanation When a city needs short-term cash flow to meet ordinary operating expenses (e.g., to meet the payroll for city employees), it issues TANs. These notes are paid off when the city collects the expected tax revenues.

A respected analyst reports that last week's T-bill rate at 1% is lower than the rate for the preceding week and lower than the average for the past month. Which of the following is true? A) Investors are paying more for T-bills. B) Investors are paying less for T-bills. C) Prices are descending. D) The general level of interest rates is increasing.

A Explanation When the rate is lower, the price has gone up. This means investors are paying more as interest rates are going down.

All of the following would flow through as a loss to limited partners except A) principal repayment on recourse debt. B) interest payments on recourse debt. C) depletion. D) accelerated depreciation.

A Explanation (LIMITED PARTNERSHIP) Principal repayments are not deductible for tax purposes. The interest is deductible.

The Class B shares of the KAPCO Fund carry a conditional deferred sales charge beginning at 5% and reducing each year after the second by 1% per year until eliminated. An investor making an initial purchase of $10,000 of these shares will pay a sales charge of A) $0.00 B) $500.00 C) $50.00 D) $100.00

A Unlike Class A shares, there is no front-end load when purchasing Class B shares. All of the money is invested at the net asset value without any sales charge. Should the investor wish to liquidate shares, there is a back-end load until the end of the seventh year, but that has nothing to do with the question.

If a customer of your firm receives stock from the estate of her mother, the stock's cost basis in the hands of the customer is A) the market value at date of distribution to the customer. B) the market value at date of death. C) the original cost of the stock. D) the original cost of the stock adjusted for any estate taxes paid.

B Explanation When securities are inherited, the heir receives a cost basis calculated as of the deceased party's date of death.

Which of the following statements about municipal brokers' brokers is not true? A) They do not maintain inventories. B) They perform specialized trades for institutions. C) They perform trades on a principal basis only. D) They do not perform retail trades with individual investors.

C Explanation A broker's broker does not maintain an inventory of bonds. Therefore, they do not act as principals; they act as agents only in trades between dealers or institutions. They do not do retail business.

A customer sells short 100 shares of XYZ at 58 and buys 1 XYZ Jan 60 call for 3. If the stock price falls to $52, the customer buys back the stock and closes the option at 1 for A) a gain of $300. B) a loss of $300. C) a gain of $400. D) a loss of $400.

C Explanation The customer made $600 on the short stock position ($58 to $52) and lost $200 on the call (bought for 3, sold at 1). Overall, the gain is $400.

If a customer buys 100 shares of stock and writes one out-of-the-money call against her long position, the breakeven point is A) the strike price plus premium. B) the strike price less premium. C) the cost of stock purchased less premium. D) the cost of stock purchased plus premium.

C Explanation When the investor owns stock and sells a call, the call is covered. Breakeven is computed by subtracting the premium from the stock's purchase price.

An investor with a $120,000 investment portfolio, split 60%/40% between a blue-chip stock fund and a utility fund, wants to invest an additional $20,000 in equities only. Increasing diversification within the equities positions and further spreading the overall risk associated with the portfolio is the objective for the new investment dollars. Which of the following investments will further diversify using equities and align with spreading the risk? A) Silicon Valley sector fund B) Money market fund C) International stock fund D) Balanced fund

C Explanation While an international stock fund is considered a higher risk investment, combining it with the equity securities already owned will increase diversification and spread the overall risk for the restructured portfolio. A sector fund targets portfolio assets in the sector defined by the fund, and therefore, reduces overall diversification. Balanced funds and money market funds include debt instruments that do not align with the equities-only criteria.

An investor purchases zero-coupon bonds issued by the U.S. Treasury due to mature in 18 years at $100,000. Which of the following might describe the primary reason for selecting that investment vehicle? The investor is 65 years old and needs the reliability of current income. The investor is 45 years old and has purchased these in an IRA rollover account and wants the assurance of funds for retirement. The investor is 30 years old and has a newborn child and wishes to assure funds for a college education. The investor is 20 years old, has just received an inheritance, and wishes to shelter income for as long as possible. A) I and II B) I and IV C) II and III D) III and IV

C Explanation Zero-coupon bonds maturing in 18 years would assure the 45-year-old of the face value at age 63. Being in an IRA, there would be no current taxation, and upon maturity, if desired, the funds could be distributed without the 10% penalty. Zero-coupon bonds are one way to guarantee funds for college education. However, with no current income, they would not be suitable for the 65-year-old and would not offer any tax shelter to the 20-year-old.

Closed-end investment company shares can be purchased and sold A) over the counter only. B) from the closed-end company. C) from the sponsor. D) in the secondary market.

D Explanation A closed-end company share is bought and sold in the secondary market.

Which of the following order types are available to customers for use in NYSE equity markets? Fill or kill (FOK) Immediate or cancel (IOC) All or none (AON) Order cancels other (OCO) A) I and IV B) II and III C) I and III D) II and IV

D Explanation IOC and OCO orders are available to customers for use in the NYSE equity markets. FOK and AON orders are no longer permitted in NYSE equity markets.

All of the following statements regarding Section 529 plans are true except A) states impose very high overall contribution limits. B) contributions to a 529 plan may be subject to gift taxation. C) the assets in the account are controlled by the account owner, not the child. D) the income level of the contributor can affect the annual contribution amount.

D Explanation Unlike Coverdell ESAs, the income level of the contributor will not affect annual contributions under a Section 529 plan.

Regulation T governs the purchase of all of the following except _________ and ____________ because they are considered exempt securities.

Explanation Regulation T applies only to nonexempt securities. Because governments and municipals are exempt, there is no federal regulation.

____________ accounts are accounts for which firms registered as both broker-dealers and investment advisers provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. ________ accounts are generally investment advisory accounts.

Wrap accounts are accounts for which firms registered as both broker-dealers and investment advisers provide a group of services, such as asset allocation, portfolio management, executions, and administration, for a single fee. Wrap accounts are generally investment advisory accounts.

If a customer buys 100 shares of MTN at 60, buys an MTN 60 call at 3, and buys an MTN 60 put at 3, the investor's maximum gain would be A) $6,000. B) $5,400. C) unlimited. D) $600.

c Explanation There is no limit to how high a stock's price can rise. Because this investor owns both the stock and an option to buy, the potential for gain is theoretically unlimited.

Which of the following money market instruments is most often used by those in the import/export business? A) Bankers' acceptances B) Variable rate demand notes C) Commercial paper D) Negotiable CDs

A Explanation Bankers' acceptances are loans guaranteed by a commercial bank that are typically used to finance international transactions. Although all of the choices are money market instruments, it is the BAs that are primarily used by those engaged in international business.

If a U.S. corporation wishes to issue eurodollar bonds, which of the following statements are true? The corporation will be subject to currency risk. The corporation will not be subject to currency risk. The issue must be filed with the SEC. The issue need not be filed with the SEC. A) II and IV B) I and IV C) I and III D) II and III

A Explanation Because eurodollar bonds are denominated in U.S. dollars, a U.S. corporate issuer will not be subject to foreign exchange risk, regardless of the country of issuance. In addition, because the bonds are issued outside the United States, the issue is not registered with the SEC.

Features of an employee stock purchase program (ESPP) include all of the following except A) contributions are made with pre-tax dollars. B) the purchase price is discounted. C) contributions are a percentage of pre-tax income. D) participants can sell the stock at any time.

A Explanation Employee stock purchase plans (ESPPs) are not qualified plans. That means that the employee purchases the stock with after-tax dollars.

The following is taken from the S&P Bond Guide: FLB Zr 37 87 87½. What is the coupon rate on this bond? A) 0% B) 8.70% C) 0.37% D) 8.75%

A Explanation FLB is the issuer, Zr means zero coupon, 37 indicates the year of maturity (2037), 87 is the bid price ($870), and 87½ is the asked price ($875).

A sophisticated investor wants to purchase stock of a foreign company or an American depositary receipt (ADR) representing the shares of that company. The purchase would align with the investor's goal of growth and income, but he makes several statements about the potential purchase, and only one of them is accurate. You feel it is important to point out and discuss from a suitability perspective which statements were and were not accurate. Which of the following is the accurate statement? A) The purchase of ADRs representing the shares exposes me to currency risk. B) I can trade the foreign shares right here on U.S. exchanges. C) With the ADRs, I'll have voting rights just like I would if I purchased the shares directly. D) The direct purchase of the foreign stock shares eliminates currency risk.

A Explanation From a suitability perspective, correcting any inaccuracies about an investment that an investor might have is important. Currency risk cannot be avoided when investing in foreign companies, either directly or using ADRs. While ADRs trade on U.S. exchanges, foreign shares do not, and ADR issuers generally do not pass on voting rights to the ADR holders.

All of the following are oil and gas program sharing arrangements except A) all-or-none underwriting arrangement. B) disproportionate sharing. C) reversionary working interest. D) functional allocation.

A Explanation Functional allocation, disproportionate sharing, and reversionary working interest are all types of oil and gas sharing arrangements. All or none is a type of best efforts underwriting agreement.

Under FINRA's Rule 2210 on communications with the public, which of the following is excluded from the filing requirements? A) Correspondence with prospective clients that is delivered through electronic media B) Retail communications concerning public direct participation programs C) Retail communications concerning collateralized mortgage obligations registered under the Securities Act of 1933 D) Retail communications that previously have been filed with FINRA and that are to be used with material change

A Explanation In most cases, retail communications must be filed with FINRA while correspondence, regardless of the method of delivery, is not. If the retail communication has previously been filed with FINRA and is being used without material change, it does not have to be refiled.

One important respect in which the Roth 401(k) differs from the Roth IRA is that A) RMDs from the Roth 401(k) must begin at age 72 while there are no RMDs from the Roth IRA. B) it is only the Roth IRA that provides for catch-up contributions for those age 50 and older. C) contributions to the Roth 401(k) are made with pre-tax funds while those to the Roth IRA are from post-tax funds. D) withdrawals from a Roth 401(k) are subject to tax on the earnings whereas all qualified withdrawals from a Roth IRA are tax-free.

A Explanation It is only the Roth IRA where the participant never has RMDs. In both cases, contributions are with after-tax money and withdrawals are tax-free. Both have the catch-up provision, and it is $6,000 in the Roth 401(k) and $1,000 in the Roth IRA.

A wealthy individual has established a trust and named you as the trustee. If you wish to establish an account that permits the trust to engage in margin transactions, which of the following statements regarding margin trading is true? A) It is permitted if provided for in the underlying documentation. B) It is permitted if the fiduciary shares in the profits or losses. C) It is not permitted. D) It is permitted if the fiduciary observes the prudent investor rule.

A Explanation Margin trading in a trust account is permitted only if it is specifically provided for in the trust agreement.

The industry term "junk bond" applies to a bond with a Standard and Poor's rating no higher than A) BB. B) B. C) C. D) BBB.

A Explanation Once a bond's rating has fallen below the top four grades (AAA, AA, A, and BBB), it is no longer considered investment grade. At that point, BB (or Moody's Ba) or lower, it is considered a high-yield or junk bond.

Which of the following orders may be used to acquire a security at a specific price or better? A buy stop limit A buy limit A sell stop A sell limit A) I and II B) II and III C) II and IV D) I and III

A Explanation Only buy orders can acquire stock. Only buy limit orders can acquire stock at a specific price or better.

Registered representatives must amend their Form U4 when all the following occur except A) if they obtain a college degree. B) if they move residences. C) if they are arrested for a misdemeanor involving financially related issues. D) if they obtain a professional credential.

A Explanation Registered representatives must amend their Form U4 if they move, are arrested for any felony for financially related misdemeanors, or obtain a professional credential. College degrees are not disclosed on the Form U4.

The Nasdaq Stock Market permits listing for all of the following except A) nonconvertible debt securities. B) common stock. C) convertible bonds. D) warrants.

A Explanation The Nasdaq Stock Market is an equity and equity equivalent market. Listed are common stock, preferred stock, warrants, limited partnerships, American depositary receipts, and convertible bonds. Straight debt securities are not part of Nasdaq.

An investor has an established margin account with a current market value of $13,500 and a debit balance of $4,775, with Regulation T at 50%. How much excess equity does the investor have in the account? A) $1,975 B) $8,725 C) $4,775 D) $13,500

A Explanation The Regulation T requirement is 50% of the current market value of $13,500 ($6,750). Equity is equal to the current market value of $13,500 minus the debit balance of $4,775 ($8,725). Excess equity is calculated by subtracting the Regulation T requirement of $6,750 from the equity of $8,725 ($1,975).

Your client writes 2 ABC Nov 220 calls at 5 and buys 200 shares of ABC common stock at $220 in his margin account. What is the breakeven point for the client's position? A) $215 B) $230 C) $210 D) $225

A Explanation The breakeven point for covered call writing is the cost of stock purchased less the premium (220 − 5). Breakeven is the same if it is one covered call, or 1,000.

If a registered representative (RR) of a FINRA member firm wants to open an account with another member firm, which of the following statements are true? The account may only be opened if the RR is also a principal of his employing broker-dealer. The account may be opened, but the RR may not engage in securities transactions that he could do through his own firm. The member firm opening the account must send duplicate confirmations to the employing member firm if the employing member firm has requested that the member firm do so. The employing broker-dealer must receive prior written notice and give prior written consent in order for the account to be opened. A) III and IV B) I and II C) I and III D) II and IV

A Explanation The employing broker-dealer must be notified, in writing, and give prior written approval for the account to be opened. It must receive duplicate confirmations and account statements if it has requested them.

Reasons why a corporation might engage in a stock buy-back program would include all of these except A) reducing annual interest expense. B) having stock available for future acquisitions. C) using the stock for employee stock options. D) increasing earnings per share.

A Explanation There is no interest expense with stock. When a company buys back its stock, it becomes treasury stock. That stock is no longer outstanding. Buying back the stock should cause the earnings per share to increase (there are now fewer shares outstanding). Many times one company will acquire another one by paying for the purchase with its treasury stock rather than cash. Many companies offer employees ownership opportunities through employee stock options. This is a way to ensure that the company has enough stock to meet the needs.

DJX Corporation's charter has authorized 10,000,000 shares of common stock. It has issued 5,000,000 shares and has 1,000,000 shares in its treasury. How many shares of DJX common stock are authorized but unissued? A) 5,000,000 B) 6,000,000 C) 9,000,000 D) 4,000,000

A Explanation This company has 10 million shares of common stock authorized. It has issued 5 million shares. The other 5 million are authorized, but unissued. Treasury stock is authorized and issued stock that is no longer outstanding.

An ABC 40 call is quoted at 4.25 - 4.50, and an ABC 45 call is quoted at 1.50 - 2.00. What is the cost of establishing a debit spread? A) $300 B) $250 C) $275 D) $225

A Explanation To establish a debit spread, an investor buys a 40 call at the ask price of 4.50 and sells a 45 call at the bid price of 1.50. The net premium paid is (4.50 minus 1.50) times 100 shares, which equals $300.

One of your customers with a JTWROS account contacts you to remove the other tenant and put the account into the customer's own name. This can be done only A) if the change has been authorized by a qualified and registered principal designated by the member. B) if you contact the other tenant and get their approval. C) if the customer has a full power of attorney over the account. D) upon the death of the other tenant.

A Explanation Under FINRA rules, no change in any account name(s) can be made unless the change has been authorized by a qualified and registered principal designated by the member. This principal must, before giving her approval of the account designation change, be personally informed of the essential facts relative thereto and indicate her approval of such change in writing. The essential facts relied upon by the person approving the change must be documented in writing and preserved with the customer account records. One of those facts is approval of the other tenant, but that approval goes to the principal, not to you, the registered representative. Even in the case of death of the other tenant, the principal needs to see the proper documentation, such as a death certificate.

An employee of a firm registers to open an account at another member firm. Under FINRA rules, all of the following statements are true except A) FINRA must receive duplicate statements and confirmations for each transaction. B) the employing member firm must be notified, in writing, of the intent to open the account. C) the employing member firm must receive duplicate statements and confirmations if requested in writing. D) the employee must receive prior written permission from the employing member firm.

A Explanation Under FINRA rules, the employing member must be notified, in writing, of the prospective account and must give prior written approval before the account can be opened. It must be provided with duplicate statements and confirmations only if it makes a written request. There is no requirement that FINRA be either notified or provided with duplicate statements and confirmations.

Which of the following would make an employee ineligible to participate in a company's qualified retirement plan? A) He is only 20 years old. B) He has been with the company for only two years. C) He works only 1,400 hours a year for the company. D) He is not a member of the company's management team.

A Explanation Under the Employee Retirement Income Security Act, anyone over the age of 21—management or not—who has been with the company for at least one year and who works 1,000 or more hours per year or 500 hours per year for three consecutive years for the company, must be allowed to participate in the company's qualified plan.

The basis of a bond with a 5% nominal yield maturing in twenty years and selling at 85 is approximately A) 5.88%. B) 6.22%. C) 4.59%. D) 5.75%. What is CY formula (easier)

B Explanation A bond's basis is its yield to maturity (YTM). It is not necessary to do the YTM calculation because it could only be one choice. We can easily compute the current yield by dividing the $50 annual interest by the $850 current market price. That is about 5.88%. The YTM must be higher than that because it includes the eventual profit realized when the bond matures at par. There is only one selection that is higher than 5.88%. The calculation would follow our formula of: Annual interest + (discount ÷ number of years to maturity) ÷ (Current market price + par) ÷ 2) Plugging in the numbers, we have: ($50 + ($150 ÷ 20 years) = ($50 + $7.50) divided by ($850 + $1,000 ÷ 2) = $57.50 ÷ $925 = 6.22%

Regulation BI established a new standard of conduct under the Securities Exchange Act of 1934 for broker-dealers and associated persons of a broker-dealer when making a recommendation of any securities transaction or investment strategy involving securities (including account recommendations) to a retail customer. All of the following are examples of account recommendations except A) opening an UTMA account for a grandchild. B) changing the asset allocation in an existing account. C) opening a margin account to go along with an existing cash account. D) taking a distribution from an employer-sponsored plan and executing a rollover into a self-directed IRA.

B Explanation Account recommendations include recommendations of securities account types generally (e.g., to open an IRA or margin account), as well as recommendations to roll over or transfer assets from one type of account to another (e.g., a workplace retirement plan account to an IRA). It has nothing to do with changing the strategy in an existing account. Rather, the desired result of an account recommendation is a new account.

One of your customers has maintained a traditional IRA for the past 15 years. Some of her annual contributions were not tax deductible due to her income level and participation in another qualified plan. At age 60, the customer elects to make a lump-sum withdrawal. Which of the following statements is true? A) The portion representing earnings and principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. B) The portion representing principal from the nondeductible contributions is tax free, while the balance is taxable as ordinary income. C) The entire withdrawal is taxable as ordinary income. D) The portion representing earnings from the nondeductible contributions is tax free, while the balance is taxable as ordinary income.

B Explanation All earnings, whether from deductible or nondeductible contributions, are tax deferred. Therefore, all earnings are taxable as ordinary income upon withdrawal. Only the nondeductible contribution is returned tax free.

A corporation is having a rights offering. The terms of the offering require eight rights plus $88 to purchase one share. With the stock's current market price at $112 per share, the theoretical value of one right on the ex-rights date is A) $2.67. B) $3.00. C) $0.27. D) $0.30. What is the formula?????

B Explanation Because the question is asking about the value on the ex-rights, it means we use the regular formula. That is, the (market price minus the subscription price) divided by the (number of rights it takes to buy one share). Plugging in the numbers gives us ($112 - $88) ÷ (8) = $24 ÷ 8 = $3.00

A buy stop order may be used for all of the following except A) to protect against loss in a short position. B) to protect a profit in a long position. C) to acquire a long position as a stock breaks through resistance. D) to protect a profit in a short position.

B Explanation Buying can only protect short positions, not long positions.

An investor had a $20,000 capital loss, a $15,000 capital gain, and $50,000 in income for the year. How much of the income is taxable? A) $53,000 B) $47,000 C) $35,000 D) $26,000

B Explanation Capital losses may be used to reduce taxable income. The first step is to net the gains and the losses. This investor has a net loss of $5,000. Of that net loss, a maximum of $3,000 can be written off against the income for the year. That reduces the investor's taxable income to $47,000. The unused $2,000 of the net loss is carried forward to subsequent tax years until utilized.

Cash dividends from real estate investment trusts (REITs) are A) taxed as long-term capital gains. B) taxed as ordinary income. C) taxed at a maximum rate for qualified dividends. D) not taxed.

B Explanation Cash dividends from REITs are taxed as ordinary income. A maximum rate for qualified dividends, which applies to qualified common stock dividends, does not apply to dividends from REITs.

Which of the following types of business organizations do not protect owners' personal assets from losses incurred by the business? General partnership Sole proprietorship S corporation C corporation A) III and IV B) I and II C) I only D) II and III

B Explanation Corporations, whether organized as C or S corporations, afford their owners limited liability, which is the protection of their personal assets from losses incurred by the businesses. General partnerships and sole proprietorships subject their owners to personal liability for losses of the business.

Which of the following statements regarding Coverdell ESAs is true? A) Contributions are tax deductible, and distributions are always taxable. B) Contributions are not tax deductible, and distributions are tax free when used for qualified educational expenses. C) Contributions are not tax deductible, and distributions for any reason are tax free. D) Contributions are tax deductible, and distributions for any reason are tax free.

B Explanation Coverdell ESAs offer after-tax contributions of up to $2,000 per student, per year for children under age 18. Distributions are tax free as long as the funds are used for education.

A quote of 2.20 bid 2.18 offered would most likely be a quote on A) a Ginnie Mae bond. B) a T-bill. C) a general obligation bond. D) a T-bond.

B Explanation Discounted instruments (such as T-bills) are quoted on a discount yield basis. Even though the number representing the bid is higher than the ask, it would be lower when converted into dollars. The greater the yield, the lower the price.

ALFA Enterprises pays a quarterly dividend of $0.15 and has earnings per share of $2.40. What is the dividend payout ratio? A) 6.25% B) 25.00% C) 30.00% D) 14.40%

B Explanation Earnings per share are typically calculated for a year, so the annual dividend of $0.60 ($0.15 × 4) is divided by $2.40 to calculate what percentage of earnings is paid as a dividend—or rather, the dividend payout ratio (0.60 / 2.40 = 25%).

One of the specific concerns that the regulators have with variable annuities is sales personnel recommending that an investor switch from an existing contract to a new one. It would generally raise a "red flag" if the customer A) elects to make the exchange under the provisions of IRS Section 1035. B) has had another deferred variable annuity exchange within the preceding 36 months. C) has had another deferred variable annuity exchange within the preceding 60 months. D) has had another deferred annuity exchange within the preceding 36 months.

B Explanation FINRA Rule 2330 frowns on recommending the exchange of one deferred variable annuity for another within a period of 36 months. This only applies to deferred variable annuities. When an exchange takes place, it is generally under the provisions of IRS Section 1035 - no red flag raised there.

Which of the following retirement plans must be ERISA compliant? A) Nonqualified plans B) 401(k) plans C) Traditional IRAs D) Roth IRAs

B Explanation For exam purposes, if it is a private employer (nongovernmental) qualified retirement plan, it must be ERISA compliant. The most widely used of those today is the 401(k) plan. The "E" in ERISA stands for employee. IRAs are individual retirement accounts; there is no employer-employee relationship. Nonqualified plans are retirement plans that do not have to follow ERISA regulations. These non-qualified plans include deferred compensation plans, individual annuities, and some payroll deduction plans.

An investor wants to open an account designated by number, not by name. In addition to the normal account-opening requirements, the registered representative A) can open this account with a written statement of ownership and approval from FINRA. B) can open the account with a written statement of ownership from the customer. C) cannot open the account in this manner. D) can open this account without additional documentation.

B Explanation For numbered accounts, there is an additional requirement that the customer must sign a document attesting to ownership.

If a customer has $9,000 of capital losses and $2,000 of capital gains in a tax year, that year's consequences are A) a $7,000 loss deduction with no carryforward. B) a $3,000 loss deduction with $4,000 carryforward. C) a $3,000 loss deduction with no carryforward. D) a $9,000 loss deduction.

B Explanation For tax purposes, the customer can net gains with losses. In this case, the customer's net losses are $7,000. However, there is an annual capital loss deduction limit of $3,000. Therefore, the investor can deduct $3,000 this year and carry forward $4,000 to the following tax year.

Which of the following statements regarding joint accounts registered as tenants in common (TIC) are true? Each party specifies a percentage of interest in the account. Each party has an equal interest in the account. The interest of a deceased tenant passes to the estate of the decedent. The interest of a deceased tenant passes to the cotenant. A) I and IV B) I and III C) II and IV D) II and III

B Explanation In a TIC account, each party must specify a percentage of interest in the account. If one party dies, his percentage of ownership passes to his estate, not to any other party to the account.

A customer buys a municipal bond regular way on Tuesday, December 23. The transaction will settle on the following A) Tuesday. B) Friday. C) Monday. D) Thursday.

B Explanation Municipal bonds, like corporate bonds, settle two business days after the trade date. December 25 (Christmas) is not a business day.

If you invest in a front-end load mutual fund and choose automatic reinvestment, you should expect that dividend distributions will be reinvested at net asset value. dividend distributions will be reinvested at the public offering price. capital gains distributions will be reinvested at net asset value. capital gains distributions will be reinvested at the public offering price. A) I and IV B) I and III C) II and IV D) II and III

B Explanation Mutual funds that offer automatic reinvestment of dividends and gains distributions must do so at net asset value.

All of the following information must be disclosed on a municipal bond confirmation of sale except A) the source of revenue backing a municipal revenue bond. B) the dated date on a municipal bond that has been outstanding for two years. C) in-whole call dates. D) the name of the guaranteeing corporation in an industrial development revenue bond issue.

B Explanation On the dated date, new issue interest starts to accrue. Once the issue makes its first interest payment to bond holders, the dated date is no longer used to compute accrued interest because there is a prior interest payment date.

Investors looking for preservation of capital will find money market mutual funds and bank-insured CDs to be appropriate vehicles. When comparing the two, it is important for a registered representative to point out that A) the redemption fees charged by money market mutual funds are comparable to the early withdrawal penalties on a CD. B) the bank CDs are insured by the FDIC while there is no assurance that the value of the money market fund will not lose money. C) money market funds are eligible IRA investments while bank-insured CDs are not. D) broker-dealers sell money market mutual funds, but not CDs.

B Explanation One of the key points that must be made when comparing a money market mutual fund investment to an insured bank CD is the FDIC insurance that applies only to the CD. Other than in very unusual (and not tested) circumstances would there be a redemption charge for a money market mutual fund; there generally is a penalty for early withdrawal from a CD. Many broker-dealers sell brokered CDs. These may or may not be FDIC insured and have other differences from those purchased directly from banks. They are issued by banks, with the broker-dealer serving as an intermediary. Both of these are eligible IRA investments.

Which of the following investors would be exempt from filing Form 144 when selling securities they own? A) An investor selling shares acquired in a Regulation D private placement B) An employee of the company selling registered shares purchased in the open market C) An affiliated person selling unregistered shares D) An employee of the company selling unregistered shares

B Explanation Rule 144 regulates the sale of control or restricted securities. Securities bought in a registered public offering are not restricted and therefore an employee of the company selling registered shares need not file Form 144. Unregistered shares or securities purchased in a private placement are restricted and Rule 144 would apply.

Your customer's margin account currently has SMA of $7,000. When asked for an explanation of what that means, you could respond that A) the account has borrowing power of 2:1. B) the account has buying power equal to 200% of the SMA. C) this is just another way of stating the equity in the account. D) the SMA will increase when the market value of short positions in the account increases.

B Explanation SMA is simply a line of credit. That is, the customer can withdraw the SMA and use it as desired. If the customer wishes to purchase securities, that SMA ($7,000 in our case) can be used to meet an initial margin call. With $7,000, one can buy $14,000 of stock. That is buying power equal to 200% (twice) of the SMA. Because SMA is a line of credit, when there is $7,000 of SMA, that is what the customer may borrow. That is a 1:1 ratio, not a 2:1. Had the choice said, "the account has buying power of 2:1," it would mean the same as the correct choice of 200%. SMA increases in a short account when the short market value decreases. Remember, short sellers are bearish. SMA and account equity are not synonymous terms and are generally different amounts.

One of your customers invests $20,000 in an oil and gas limited partnership program. The Schedule K-1 she receives at year-end from the partnership indicates that operating revenues and operating expenses were exactly the same. In addition, her share of the year's depletion allowance is $6,000. During the year, she received a cash distribution of $8,000. What is her basis as of year-end? A) $12,000 B) $6,000 C) $8,000 D) $16,000

B Explanation She began with a basis of $20,000 (her original investment). During the year, she received a distribution of $8,000. That lowered her basis (the amount of money "at risk") to $12,000. In addition, the depletion represents a nonoperating expense that can be taken as a loss. That brings the basis down to $6,000.

If a client has a margin account with $23,000 in securities and a debit of $12,000, and Regulation T is 50%, which of the following statements are true? The account is restricted. The client will receive a margin call for $500. The client may withdraw securities if she deposits 50% of the market value of the securities withdrawn. The account has excess equity of $5,250. A) III and IV B) I and III C) II and III D) I and II

B Explanation The account is restricted by $500 because the equity of $11,000 is less than the Regulation T requirement of 50% ($11,500). However, the client will not receive a margin call for the $500 because Regulation T applies only to the initial purchase. Because the account is restricted, any withdrawal of securities requires a cash deposit of 50% or a deposit of securities with a loan value of 50% of the value of the securities withdrawn. The account is $5,250 above the required minimum maintenance margin, but this amount is not considered excess equity.

ABC Company issues a 10% bond due in 10 years. The bond is convertible into ABC common stock at a conversion price of $25 per share. The ABC bond is quoted at 90. Parity of the common stock is A) $25.00. B) $22.50. C) $100.00. D) $36.00.

B Explanation The bond is quoted at 90, so it is selling for $900. The parity price of the common stock is $22.50, calculated as follows: the bondholder could convert the bond into 40 shares of stock ($1,000 face amount / $25 per share = 40 shares). Because the bond has a current price of $900, divide $900 by 40 to get the underlying parity price (90% × $25 = $22.50).

The bond resolution includes all covenants between A) the issuer and the bond counsel. B) the issuer and the trustee acting for the bondholders. C) the bond counsel and the bondholders. D) the issuer and the Municipal Securities Rulemaking Board.

B Explanation The bond resolution describes not only the characteristics of the proposed offering, but also the obligations the issuer has to its bondholders.

A customer shorts 1 OEX (S&P 100) 935 call at 7. If the customer is assigned an exercise notice on the call when the OEX closes at 944, the customer realizes A) a $1,600 loss. B) a $200 loss. C) a $700 gain. D) a $900 loss.

B Explanation The call is in the money by 9 (944 − 935). The writer must deliver cash to the buyer equal to the intrinsic value. To determine the investor's profit or loss, the intrinsic value is reduced by the premium paid (9 − 7 = 2). Because each index point is worth $100, the investor has a loss of $200 because the money paid on exercise exceeded the premium received.

A customer sells short 100 shares of XYZ Corporation at $78 per share. The support and resistance levels for XYZ are at $70 and $80, respectively. If he wishes to protect his position, which of the following is the best place to put in a buy stop order? A) $70.10 B) $80.10 C) $78.10 D) $69.85

B Explanation The client will want to place a buy stop a little above the resistance level to protect himself against an upside breakout. Entering a buy stop order too close to the purchase price (78.10) would not afford the client an opportunity for gain.

A husband and wife wish to open a Roth IRA. She is 49 years old and earns $99,000 per year; he is 51 and earns $49,000 per year. What is the maximum permitted contribution for the married couple, based on age and income? A) Husband $6,000 and wife $6,000 B) Husband $7,000 and wife $6,000 C) Husband $6,000 and wife $0 D) Husband $7,000 and wife $0

B Explanation The husband may contribute $7,000 and his wife may contribute $6,000. For married couples, an adjusted gross income level of $196,000 (2020) begins to limit the amount of contribution that is permitted into a Roth IRA (although this specific amount is never tested). The married couple has an income level of $148,000, well below that AGI. Therefore, each would be permitted to make the maximum contribution. The wife may contribute a maximum amount of $6,000. Because the husband is 51, he is eligible to contribute an additional $1,000 per year (the catch-up provision applied to those age 50 and older) for a contribution of $7,000.

A customer has a nonqualified variable annuity. Once the contract is annuitized, monthly payments to the customer are A) 100% tax deferred. B) partially a tax-free return of capital and partially taxable. C) 100% tax free. D) 100% taxable.

B Explanation The investor has already paid tax on the contributions, but the earnings have grown tax deferred. When the annuitization option is selected, each payment represents both capital and earnings. The money paid in will be returned tax free, but the earnings portion will be taxed as ordinary income.

Members of a syndicate receive notice of their share of the offering through A) the official statement. B) the syndicate letter. C) the prospectus. D) the due diligence meeting.

B Explanation The syndicate letter is sent by a municipal dealer to prospective members inviting them to join the syndicate and setting forth the conditions of the syndicate. Such conditions include who the manager will be, the percentage participation (each member's share), and the amount of good faith deposit required.

One of your customers had a sideline business that was just sold for $100,000. The customer is 47 and wants to put that money into an investment that can be left alone for the next 20 years until expected retirement. Which of the following is likely the most suitable choice for this customer? A) An investment grade bond fund with an average duration of 20 years B) A target date fund with a date 20 years from today C) A portfolio that is 70/30 equities today gradually rebalancing to 50/50 at retirement age D) A small-cap growth fund with reinvestment of distributions

B Explanation This is exactly what target date funds are designed for. As the investor gets closer to the target retirement age, the portfolio managers shift the concentration from equities to fixed income. Why doesn't the 70/30 shifting to 50/50 portfolio work here? Because the question states that the customer wants a "hands off" approach, something the target date fund does automatically. The small-cap growth fund might be too aggressive and a bond fund is not aggressive enough when the time horizon is 20 years.

If an investor keeps $100,000 invested in U.S. Treasury bills at all times during a 10-year period, she is subject to which of the following? Stable principal Unstable principal Stable interest Unstable interest A) II and III B) I and IV C) II and IV D) I and III

B Explanation Treasury bills are purchased at a discount and mature at face value. This feature provides principal stability to investors who own them. The discount on bills is determined by current market interest rates and fluctuates accordingly.

JDX Corporation's charter has authorized 10,000,000 shares of common stock. It has issued 5,000,000 shares and has 1,000,000 shares in its treasury. JDX decides to use all of the treasury stock to pay a dividend to shareholders. As a result, the number of outstanding shares is A) 6,000,000. B) 5,000,000. C) 4,000,000. D) 10,000,000.

B Explanation Treasury stock is stock that has been issued and reacquired by the company. At that point, it is no longer outstanding in the hands of the public. Sending those shares out as a dividend puts them back in the hands of the investing public. Now, all of the five million issued shares are outstanding.

ABC Corporation has issued a convertible preferred stock with a par value of $100. The stock is convertible at $40. The current market price of the stock is $80. It would be correct to state that the conversion ratio is A) 2:1. B) 2.5:1. C) 4:5. D) 4:10.

B Explanation When a $100 par preferred has a conversion price of $40, the stockholder can convert into 2.5 shares. That is a 2.5:1 ratio. The current market price of the stock is only relevant if the question asks about the parity price (which is $32).

Your client is considering two bonds: an ABC Corporation mortgage bond with a yield to maturity of 9% and a municipal bond issued by the state that she resides in. If your client is in the 32% tax bracket, what is the tax-free equivalent yield for the corporate mortgage bond so that she will be able to compare it to the tax-free municipal bond she is considering? A) 2.88% B) 6.12% C) 4.10% D) 13.24%

B Explanation When the yield on the corporate taxable bond is given and the question asks for the equivalent after-tax yield of a tax-free municipal bond, we calculate that as follows: corporate rate × (1 − investor's tax bracket). In this case, 0.09 × (1 − 0.32) = 0.09 × 0.68 = 0.0612, or 6.12%. Without all of those zeros, it is 9% × 68% = 6.12%. Alternatively, just subtract the 32% tax from 9%. That would be 9% − (9% × 32%) = 9% − 2.88% tax = 6.12%. Remember, because the investor is paying taxes at a rate of 32%, she is keeping only 68% of the income received on a taxable security compared to 100% on a tax-free municipal bond. When the coupon rate of the tax-free security is given and the question is asking about the tax-equivalent yield of that security (it will always be higher than the coupon), we need to divide. Divide the municipal coupon rate by (100% minus the tax bracket). For example, if this question has said that the coupon on the municipal bond was 6.12% and asked for the TEY, you would divide 6.12% by 68%. Do that on your calculator and the result is 9%. The key to remembering which formula works is that when the coupon on the taxable security is given, the answer will always be lower than that coupon. That means subtracting. When the coupon on the tax-free security is given, the answer will always be higher than that coupon and that means dividing.

Which of the following characteristics are applicable to real estate investment trusts (REITs)? A) REITs have guaranteed minimum dividends. B) Dividends from REITs are taxed as ordinary income. C) REIT shares cannot be bought or sold in the secondary market and are therefore considered illiquid. D) Any losses from the real estate portfolio flow through to the REIT shareholders.

B Explanation While income flows through to REIT shareholders in the form of dividends, losses do not flow through. When a REIT pays a dividend, it will be taxed as ordinary income, but there are no guaranteed minimum dividend payouts. They trade both on exchanges and over the counter, and are therefore considered to be liquid investments.

A retiree is paid an annual amount equal to 30% of the average of his last three years' salary. Which of the following retirement plans offers this type of payment? A) Profit-sharing B) Defined contribution C) Defined benefit D) Deferred compensation

C Explanation A defined benefit retirement plan establishes, in advance, the payout to be received by the retiree.

ABC, Inc., has 1 million shares of common stock outstanding ($10 par value), paid-in surplus of $10 million, and retained earnings of $20 million. If ABC stock is trading at $20 per share, what would be the effect of a 2-for-1 stock split? A) The retained earnings would be decreased by $10 million. B) The market price of the stock would double. C) The par value would decrease to $5 per share. D) The number of shares outstanding would decrease by 50%.

C Explanation A stock split results in more outstanding shares at a lower par value per share. In the case of a 2-for-1 split, there are twice as many shares (2 million) and the par value is cut in half ($10 ÷ 2 = $5) The total par value of stock outstanding is unchanged ($2 million times $5 = the same $10 million in total par value). Remember, a 2:1 split is the same as changing a $10 bill for two $5 bills. Retained earnings are not affected by a stock split. Although not part of this question, the market value of the stock would be approximately $10 per share (half of the $20 per share before the split).

Which of the following statements regarding index options are true? Exercise is settled in cash. Exercise settlement value is based on the value of the index at the time exercise instructions are received. Exercise settlement value is based on the closing index value on the day exercise instructions are tendered. Exercise settlement is T+2. A) II and III B) II and IV C) I and III D) I and II

C Explanation All index option exercises are settled in cash. The amount a writer owes the holder is known as the intrinsic value of the option, and the settlement value is based on the closing index value on the day exercise instructions are tendered. Exercise settlement is the next business day.

An investor buys 100 shares of QRS stock at $60 and writes 1 QRS 60 call at 4 and 1 QRS 60 put at 5. If QRS stock is trading at $74 on the expiration date, the investor realizes a profit of A) $400. B) $100. C) $900. D) $500.

C Explanation An investor can write (short) a straddle whether or not she owns the stock. The benefit in doing so when you own the stock is that the call being written is covered by the long stock, so you don't have the unlimited potential for loss. The question's solution relies on using the T-chart. "An investor buys 100 shares of QRS stock at 60 and writes 1 QRS 60 call at 4 and 1 QRS 60 put at 5. If QRS stock is trading at $74 on the expiration date, the investor realizes a profit of" Step 1: $6,000 goes out for the purchase of the stock. Step 2: $400 comes in from the sale of the call and $500 comes in from the sale of the put. Step 3: We always assume that out-of-the money short option positions are closed out (bought back) at their intrinsic value on expiration date, and in-the-money options are exercised. That means, with the market value of $74, the 60 call will be exercised with the investor selling the stock for $6,000 (in on the T-chart). No one is going to put us the stock at 60 when it is selling at 74, so the put expires, resulting in zero going out to close it. Step 4: The realized profit means only from gains or losses realized. Because the call option is exercised, we know the stock was sold for the 60 strike price Step 5: Put these all together. We started with $6,000 out for the stock purchase and $900 in for the sale of the two options. The call is exercised, so $6,000 comes in and the put expires, so $0 goes out. The result? $6,000 out and $6,900 in, for a profit of $900.

An investor in fixed-income debt securities wishing to eliminate interest rate risk could do so by A) purchasing a bond fund rather than individual bonds. B) limiting purchases to investment-grade debt. C) holding the securities until they mature. D) increasing the duration.

C Explanation As we know, when interest rates go up, bond prices go down. Therefore, bondholders are at risk to their principal when interest rates change. However, there is no interest rate risk to the principal if the bond is held to maturity. Regardless of the current market interest rates, the bond pays off at par value. The risk is highest as the duration lengthens. Because bond funds do not have a maturity date, they cannot avoid this risk. The rating (quality) is irrelevant; even Treasury bonds are affected by changes in interest rates.

As the initial transaction in a new margin account, your customer shorts 100 shares of DMF at 30. With Regulation T at 50%, she will receive a margin call for A) $750. B) $1,500. C) $2,000. D) $3,000.

C Explanation Because the total market value of the transaction is $3,000, the initial margin would be $1,500 (50% of $3,000). However, minimum initial margin is $2,000.

An investor has purchased a municipal certificate of participation (COP). COPs can be characterized by all of the following except A) the holder of a COP could foreclose on the asset generating the revenue in the case of default. B) they are a form of municipal revenue bond. C) they would require voter approval before a municipality could issue them. D) the holder of the COP participates in lease or loan payments from a specific piece of equipment or facility purchased or built by the municipality.

C Explanation COPs are considered revenue issues and, therefore, do not require voter approval. They are a form of lease revenue bond that allow the holders of the certificates to participate in some revenue stream (lease or loan payments) associated with land, equipment, or facilities purchased or built by the municipality. They are unique in that in the case of default, the holders of the COPs could foreclose on the asset associated with the certificate.

Unless instructed otherwise, when customers purchase common stock in a cash account, your firm holds securities in street name. One of your customers requests that you use the DRS program for registration of their ownership. This means A) the stock is registered in the customer's name but the mutual fund's custodian bank holds the security in book-entry form. B) the stock is registered in the customer's name but the broker-dealer that holds the account is the one that holds the security in street name. C) the stock is registered in the customer's name but the company that issued the stock (or its transfer agent) is the one that holds the security in book-entry form. D) the stock is registered in the customer's name but the broker-dealer that holds the account is the one that holds the security in book-entry form.

C Explanation DRS stands for Direct Registration System. It is a program that began in the mid-1990s as an alternative to "street name" registration for customer securities. Like street name, DRS is based on electronic bookkeeping. In direct registration, a stock is registered in an investor's name, but the company that issued the stock (or its transfer agent) is the one that holds the security in book-entry form, instead of a broker-dealer. Note that the question does not deal with mutual funds.

Features of an employee stock purchase program (ESPP) include all of the following except A) contributions are made with pre-tax dollars. B) the purchase price is discounted. C) contributions are a percentage of pre-tax income. D) participants can sell the stock at any time.

C Explanation Employee stock purchase plans (ESPPs) are not qualified plans. That means that the employee purchases the stock with after-tax dollars. For example, an individual has a monthly salary of $5,000 and elects to contribute 10% of gross salary to the plan. The employer will take $500 per month out of the paycheck after subtracting withholding tax and Social Security contributions and any other deductions. Before enrolling in the plan, this employee's monthly take-home pay might have been $3,700. Now it will be $3,200.

Income from which of the following is not partially exempt to a corporate investor? A) Preferred stock B) Common stock C) Convertible bonds D) Preferred stock mutual funds

C Explanation Fifty percent of dividend income received from investments in common stock and preferred stock is excluded from taxation for a corporate investor. This exclusion applies to dividends from mutual funds where all of the portfolio securities are preferred or common stock.

Your broker-dealer has prepared an advertising piece for general distribution to all of its retail customers regarding numerous option strategies. Filing the piece with FINRA is A) not required. B) required within 10 business days of the time it is first used or published. C) required at least 10 business days before first use or publication. D) required to occur no later than the end of the month during which it was used.

C Explanation Filing with FINRA is required at least 10 business days before first use or publication for retail communications having to do with options.

An investor might expect to receive the greatest gain on an investment in a corporate bond by purchasing A) long-term bonds when interest rates are low. B) short-term bonds when interest rates are high. C) long-term bonds when interest rates are high. D) short-term bonds when interest rates are low.

C Explanation If an investor purchases bonds when market interest rates are high, a drop in interest rates will lead to a corresponding increase in bond value. Long-term debt instruments will fluctuate to a greater degree than those with short-term interest rates. Thus, long-term debt offers the greater chance of gain.

Two friends would like to open a joint account but have the tax filed under the name of the nonemployed individual. That could be done in A) an account opened as a partnership. B) a joint account with a TOD designation. C) a JTWROS account with the Social Security number of the designated person used. D) a tenants in common account with the percentage ownership in the name of the designated person.

C Explanation In a JTWROS account, the assets are considered jointly owned. Only one tax identification number (Social Security number) is placed on the account. If it is the number of the nonemployed individual, the Form 1099 will go to that person and that is whom the IRS will expect to pay the taxes. That might be the correct answer to a test question.

Which of the following plans requires an actuary's services? A) Profit-sharing B) Defined contribution C) Defined benefit D) 401(k)

C Explanation In a defined benefit plan, the payout is established, and employers must contribute annually to assure payment of the benefit amount. An actuary must calculate the annual contribution amount necessary to meet the benefit requirement.

Your married customers, ages 48 and 50, have a combined annual income of more than $200,000. They are concerned about the effects of rising inflation, and because they are heavily invested in bonds, they seek to invest a portion of their portfolio in a fund that will provide additional diversification. Which of the following mutual funds is the most suitable for these customers? A) NavCo Tax-Free Municipal Bond Fund B) ABC Investment-Grade Bond Fund C) ATF Overseas Opportunities Fund D) XYZ Government Income Fund

C Explanation Investment in an overseas equity fund will provide diversification not necessarily subject to U.S. inflation. The tax-free fund will not provide additional diversification or the best hedge against inflation. A high-grade bond fund will not add diversification.

The concept of double taxation applies to shareholders of A) general partnerships. B) limited partnerships. C) C corporations. D) S corporations.

C Explanation It is the C corporation where the owners contend with double taxation. The first tax is on the corporation's earnings. After that, any dividends distributed to the shareholders are subject to tax.

Dale Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. Wells is looking for favorable tax treatment of earnings and losses. Wells also wants to limit the number of investors but is willing to share control of the enterprise with others to attract them. What business form would you advise? A) C corporation B) Limited partnership C) General partnership D) S corporation

C Explanation Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. Although an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.

Which of the following statements is true? A) All retail communications require submission to the FINRA Department of Advertising. B) Institutional communications material always requires prior principal approval. C) Institutional communications do not require prior principal review if associated persons receive training in the firm's procedures governing institutional communications. D) All retail communications require prior principal approval.

C Explanation Member firms have a choice of procedures to follow when it comes to institutional communications. Review prior to use is the preferred option for many firms. The alternative is proper training of associated persons as to the firm's procedures governing institutional communications, documentation of such education and training, and surveillance and follow-up to ensure that such procedures are implemented and adhered to. Evidence that these supervisory procedures have been implemented and carried out must be maintained and made available to FINRA upon request. Not all retail communications must be filed with FINRA and not all retail communications must have prior principal approval. For example, any retail communication that does not make any financial or investment recommendation or otherwise promote a product or service of the member does not require prior principal approval or filing with FINRA

Which of the following would be considered improper by FINRA? A) A registered representative giving a $500 wedding gift to her brother who is one of her clients. B) A mutual fund distributor offering a member firm a free training seminar held at the distributor's home office for up to two representatives selected by the member firm. C) A member firm awarding a $1,000 cash bonus to any employee who, during the next month, sells at least $100,000 of the company's proprietary mutual fund D) A member firm awarding a $1,000 cash bonus to any employee who, during the next month, sells at least $100,000 of any mutual funds the firm has sales agreements with

C Explanation No compensation, especially in the form of a bonus, may be conditioned on the sale of a specific product. This is particularly egregious behavior when the product is proprietary. Paying a $1,000 bonus for reaching a sales goal is fine, as long as no specific product is targeted. Training seminars, even with all expenses paid by a fund distributor, are fine as long as the firm selects the attendees based on other considerations than sales of that distributor's funds and the location is appropriate. It would be hard for FINRA to fault this wedding gift to a brother in spite of the client relationship.

A walk-in customer completes the new account form and includes all of the information required by the customer identification program. However, the customer supplies none of the requested financial data and is unwilling to discuss objectives. Under Regulation BI of the SEC, A) the account may be opened, but only after receiving SEC approval. B) opening this account could place the firm in the position of violating Regulation BI. C) the account may be opened, but no recommendations may be made. D) the account may be opened, but all recommendations must be suitable based on the customer's situation.

C Explanation Regulation BI deals with recommendations from a broker-dealers to its customers. As long as there are no recommendations, the rule does not apply. When the customer refuses to supply the necessary suitability information, the account may be opened, but trading must be limited to unsolicited orders.

The KPL Corporation is considering having its stock listed on the New York Stock Exchange (NYSE). Who will make the final decision as to whether it will be listed? A) FINRA B) The Board of Directors of KPL C) The NYSE D) The SEC

C Explanation The NYSE has certain requirements that a company must meet before its stock can be considered for listing. Because the NYSE sets the requirements, it must make the final decision.

Investing into mutual fund Class A shares will result in a customer paying a sales charge that is imposed at the time of purchase. That is why these shares are called front-end load shares. With Class A shares, the investor might be entitled to breakpoints resulting in the customer paying a reduced sales charge based on a breakpoint schedule found in the prospectus. Purchases by which of the following can be combined to reach breakpoints? A) An investment club B) A parent and adult child C) A married couple D) A parent and dependent adult child

C Explanation The accounts of married couples are eligible to be combined to reach breakpoint levels. Also eligible are parents with minor children. Parents with adult children are not eligible, even if the child is a dependent, and investment clubs are specifically mentioned in the law as not eligible.

It would be expected that your firm would employ heightened suitability standards when evaluating recommendations for A) cumulative preferred stock. B) sovereign debt. C) structured products. D) nonvoting common stock.

C Explanation The higher the risk of the investment, the greater the need for checking suitability. Structured products, such as equity-linked notes and exchange-traded notes, are considered complex products. In many cases, FINRA has discovered that registered representatives had inadequate understanding of the investment, leading to their making unsuitable recommendations.

If your client expected short-term interest rates to fall, you might recommend that the client A) buy a Treasury bond yield-based put. B) write a Treasury bill yield-based call. C) buy a Treasury bill yield-based put. D) buy a Treasury bill yield-based call.

C Explanation The key to debt options is that the investor is betting on the movement of interest rates, not the price of the security. As with any other investment based on downward movement (put down), the strategy called for here is buying a U.S. Treasury bill put option. Why not the Treasury bond put? Because the question refers to short-term rates and Treasury bonds are a play on long-term ones.

In most cases, new municipal bond issues are accompanied by a legal opinion. That legal opinion is drafted by bond counsel hired by A) the syndicate. B) the MSRB. C) the municipal issuer. D) the managing underwriter.

C Explanation The legal opinion is written by an independent law firm hired by the municipal issuer. The underwriter or syndicate can also hire counsel, but that is not the official legal opinion attached to the bond.

When a broker-dealer sends a communication to its customers that the sweep account used for customer credit balances will be changed from one money market fund to a different one, the communication must include A) a detailed explanation of the reason for the change. B) a description of the objectives of the new fund and its prospectus. C) a tabular comparison of the nature and amount of the fees charged by each fund. D) a statement that the change will not take place until at least 45 days after the communication was sent.

C Explanation The only one of these meeting FINRA's requirement when a negative response letter is sent is the tabular comparison. While a description of the new fund and its prospectus is required, the communication must also include a comparison of the objectives of the two funds. The minimum time is 30 days (not 45) and there is no requirement to include an explanation.

All of the following are fixed option contract terms except A) the multiplier in an index option. B) the units of currency in a currency option. C) the premium in a stock option. D) the expiration month in a debt option.

C Explanation The premium is not a predetermined characteristic of the option contract. The premium continually changes throughout the life of the option, reflecting changes in the price of the underlying security, dividends (if any), and interest rates.

An individual owns Class A shares of the KAPCO Growth Fund with a total value at the current offering price of $20,000. KAPCO has a sales charge of 8% that reduces to 5% at $25,000. If the fund offers a right of accumulation, the sales charge on an additional investment of $10,000 will be A) $400. B) $250. C) $500. D) $800. A customer is receiving annuitized payments from a variable annuity. The annuitized payments are viewed for tax purposes as Your 65-year-old client owns a nonqualified variable annuity. He originally invested $29,000 four years ago, and it now has a value of $39,000. If your client, who is in the 28% tax bracket, makes a lump-sum withdrawal of $15,000, what tax liability results from the withdrawal? A) $2,800 B) $0 C) $4,200 D) $3,800

C Explanation The question tells us that there is a breakpoint at $25,000. Once that dollar amount is reached, the sales charge on all new purchases is reduced from 8% to 5%. Rights of accumulation means that we add a new purchase to the existing account value. If that total reaches or exceeds the breakpoint, the entire purchase is made with the lower sales charge. In this question, adding the $10,000 purchase to the existing $20,000 takes the customer's account past the $25,000 breakpoint. Therefore, the entire new purchase is charged 5%. So, $10,000 times 5% equals $500. Annuitized payments from a variable annuity are viewed for tax purposes as part earnings and part cost basis. The earnings are taxable, but the cost basis is returned tax-free. A Explanation This annuity is nonqualified, which means the client has paid for it with after-tax dollars and has a basis equal to the original $29,000 investment. Consequently, the client pays taxes only on the growth portion of the withdrawal ($10,000). The tax on this is $2,800 ($10,000 × 28%). Because the client is older than age 59½, she does not pay 10% premature distribution penalty tax.

The trust indenture of a revenue bond includes a statement explaining rates will be maintained at a level sufficient to cover the debt service and operating expenses. This statement would be found in that part of the indenture dealing with A) the official statement. B) the flow of funds. C) the bond covenants. D) the feasibility study.

C Explanation The trust indenture of a bond contains the protective bond covenants. Within the bond covenants can be found the rate covenant, which is a statement explaining that rates or user fees will be maintained at a level sufficient to cover the debt service and operating expenses for the bond issue.

If an investor buys 1 TIP Jul 60 call at 4 and sells 1 TIP Jul 50 call at 8.50, what will be the investor's overall net profit or loss if both calls expire unexercised? A) $1,250 loss B) $450 loss C) $450 profit tD) $1,250 profit

C Explanation This is a credit call spread because the larger premium of the two options is associated with the short call. The best possibility for this investor is expiration, when the maximum gain is realized. The maximum gain on a credit spread is the net credit. In this example, the investor paid 4 and received 8.50 for a net premium and maximum gain of 4.50.

If a customer gives his broker-dealer an order to sell his stock if it falls to or below 69 and will not accept a price below 69, the order is A) a sell limit order. B) a stop order. C) a stop limit order. D) a buy limit order.

C Explanation When an order is entered this way, the client has specified that it should not be triggered until the stock is at or below 69, a stop order. Because the client will not accept an execution below 69, it is a stop limit order.

If an investor opens a new margin account and sells short 100 shares of COD at 87.25, with Regulation T at 50%, what is the investor's required deposit? A) $2,617.50. B) $2,181.25. C) $4,362.50. D) $8,725.00.

C The required deposit is calculated by multiplying the market value of $8,725 by the Regulation T requirement of 50% ($4,362.50).

All of the following are characteristics of both oil and gas, as well as real estate limited partnerships, except A) limited liability. B) deferral of benefits. C) depreciation. D) depletion.

D Explanation A depletion allowance makes up for the using up of a natural resource. Real estate limited partnerships do not have depletion allowances. Both real estate and oil and gas partnerships offer limited liability, depreciation allowances, and deferred receipt of income and capital gains.

From the viewpoint of a fundamental analyst, which of the following has little, if any, significance? A) A company's CEO resigning B) A company reporting higher or lower sales C) A company reporting higher or lower earnings D) A company's stock reaching new highs or lows

D Explanation A fundamental analyst looks at the company's internals. That includes management changes, earnings or sales reports, but not anything to do with the trading of the company's stock. That is the purview of the technical analyst.

According to FINRA rules, duplicate confirmations of transactions must be sent to an account owner's employer—if requested to do so by the employer—whenever establishing a margin account for a bank officer. an employee of another broker-dealer. an independent insurance agent. an officer of another broker-dealer. A) II and IV B) III and IV C) I and II D) I and III

D Explanation According to FINRA rules, when an employee of a member firm opens an account with another member broker-dealer, duplicate confirmations and account statements must be sent to the employer by the broker-dealer establishing the account when the employer requests it to do so. An officer of a broker-dealer is considered an employee.

A customer has $12,000 of capital gains, $15,000 of capital losses, and $50,000 adjusted gross income. How much unused loss is carried forward to the following tax year? A) $12,000 B) $3,000 C) $15,000 D) $0

D Explanation After netting capital gain and losses, the customer has a net capital loss of $3,000. Because $3,000 of net losses can be deducted from income in any single tax year, there is no carryforward.

Dividends from American depositary receipts (ADRs) held by U.S. investors are declared in A) U.S. dollars and paid in U.S. dollars. B) the foreign currency and paid in the foreign currency. C) U.S dollars but paid in the foreign currency. D) the foreign currency but paid in U.S. dollars.

D Explanation Although the dividends paid by ADRs held by U.S. investors are declared in the foreign currency, they are paid in U.S. dollars. This is one reason currency risk is a factor for ADR holders.

An officer of a broker-dealer firm would be categorized as a restricted person if she attempted to purchase A) call options on a stock she believed was going down in price. B) a municipal bond in a state where she does not reside. C) closed-end funds on the secondary market. D) a new issue.

D Explanation As restricted persons, officers of broker-dealer firms or other institutional investors are prohibited from purchasing a new issue.

XYZ Corporation has a market price of $45 per share and earnings per share (EPS) of $3 when XYZ announces a 3-for-1 split. After the split, the price-to-earnings (P/E) ratio of XYZ will be A) 5. B) 3. C) 45. D) 15.

D Explanation Before the split, the company had a P/E ratio of 15 ($45 per share / $3). After the split, the price per share and the EPS drop in the same proportion, leaving the P/E ratio unchanged (new price = $15, new EPS = $1).

A customer receives a cash dividend of $1,000 in his margin account. How much of the dividend will be credited to the special memorandum account (SMA)? A) $0 B) $250 C) $500 D) $1,000

D Explanation Cash dividends and interest are considered nonrequired deposits to a margin account and are credited in full to SMA. Once credited to SMA, 100% of the deposit could be withdrawn unless doing so would create a margin call.

All of the following are characteristics associated with equity-linked notes (ELNs) except A) they can be exchange traded or traded over-the-counter (OTC). B) they are considered to be nonconventional structured investments. C) they have final payments at maturity linked to the return of an underlying stock or basket of stocks. D) they are equity securities.

D Explanation Despite their name, ELNs are debt instruments, not equity instruments. They have a partial fixed return, as well as a final payment linked to the performance of a single stock or equity index. Some are exchange traded, while others trade OTC. FINRA, who considers ELNs to be nonconventional structured investments, has expressed concerns that investors might not fully understand ELNs or the risks associated with them.

A customer purchases 200 shares of Pyrrhic Trophy Manufacturing Corporation (PTMC) at $105 per share. With the stock at $122 per share, the customer sells one PTMC Jan $120 call option for 3.50. One week prior to expiration, PTMC is selling for $132 per share, and the customer is assigned an exercise notice. The tax consequence of this is A) a capital gain of $1,500. B) a capital gain of $2,050. C) a capital gain of $3,700. D) a capital gain of $1,850.

D Explanation Even though the investor purchased 200 shares, only one call option was written. When exercised, it is only 100 shares that are sold. The numbers are: Bought 100 shares for $10,500. Sold them at the strike price of 120 (100 times $120) bringing in $12,000. That is a capital gain of $1,500. In addition there is the $350 premium received when the option was sold. That makes the total $1,850.

Your customer has experienced $7,500 in capital losses this year. He has realized $2,000 in capital gains and has $65,000 adjusted gross income. How much of his loss will he be able to carry forward to next year? A) None B) $4,500 C) $5,500 D) $2,500

D Explanation He will first offset his $2,000 in capital gains, leaving $5,500 in losses. He next offsets $3,000 in adjusted gross income, leaving $2,500 in losses to carry forward to next year. Provided the loss is offset to the maximum each year, there is no limit to how long losses may be carried forward.

An investor purchases a 2x leveraged ETF. The index value is $100. On day 1, the index falls by 10% and then on day 2 goes up by 10%. How has this affected the investor's account? A) It is down 1%. B) It is up 1%. C) It is even. D) It is down 4%.

D Explanation If the index drops by 10 points on day 1, it has a 10% loss and a resulting value of 90. Assuming it achieved its stated objective, the leveraged ETF would therefore drop 20% on that day and have an ending value of $80. On day 2, if the index rises 10%, the index value increases to 99. For the ETF, its value for day 2 would rise by 20%, which means the ETF would have a value of $96 (80 × 20% = 16). On both days, the leveraged ETF did exactly what it was supposed to do—it produced daily returns that were two times the daily index returns. But let's look at the results over the two-day period: the index lost 1% (it fell from 100 to 99) while the 2x leveraged ETF lost 4% (it fell from $100 to $96). That means that over the two-day period, the ETF's negative returns were 4 times as much as the two-day return of the index instead of 2 times the return.

An investor purchases five Mount Vernon Port Authority J & J 1 bonds in a regular way transaction on Wednesday, October 18. How many days of accrued interest are added to the bond's price? A) 108 B) 114 C) 110 D) 109

D Explanation Interest accrues on municipal bonds on a 360-day-year basis, with all months having 30 days. This bond pays interest on January and July 1 (J & J 1). Therefore, July, August, and September each have 30 days of accrued interest, and October has 19 days of accrued interest; this totals 109 days. Settlement date is Friday, October 20. The easiest way to do these accrued interest questions is to set the dates up numerically. That is, the settlement date is 10/20 and the previous interest payment date is 7/01. Do the subtraction: 10/20 -7/01 3/19 3 times 30 = 90 +19 = 109

A collateralized mortgage obligation (CMO) makes an interest-only payment to an investor. This payment will be A) taxed as a capital gain if the underlying mortgage is prepaid. B) tax free. C) treated partly as ordinary income and partly as a tax-free return of principal. D) taxed as ordinary income.

D Explanation Interest-only payments made by CMOs are taxed as ordinary income.

One of your customers owns a limited partnership interest in an oil and gas drilling program. The program was successful in finding oil and is expected to operate at a loss for the next year. The loss flowing through to the limited partner is generated by all of these except A) accelerated depreciation taken on the drilling equipment. B) depletion on the sale of oil removed from the ground. C) interest payments on partnership debt. D) principal repayment on partnership debt.

D Explanation Losses occur when expenses exceed revenues. Principal repayments are not an expense. Interest on debt is a deductible expense. Natural resources deplete and the depletion allowance is an expense similar in concept to depreciation, another expense. From a personal standpoint, compare this to your home mortgage−the interest is a deductible expense, but the portion representing payment of principal is not.

hich of the following order types is permitted in Nasdaq and NYSE equity markets? A) Good til canceled (GTC) B) Stop C) Fill or kill (FOK) D) Market

D Explanation Market orders are permitted on both of these major trading markets. Fill or kill, GTC, and stop orders may no longer be entered in the Nasdaq and NYSE equity markets. Most large broker-dealers provide the service of handling these orders.

A 7% convertible debenture is selling at 101. It is convertible into the common stock of the same corporation at $25. The common stock is currently trading at $23. If the stock were trading at parity with the debenture, the price of the stock would be A) $40.00. B) $43.91. C) $25.00. D) $25.25.

D Explanation To determine the parity price of the common, first find the number of shares the debenture is convertible into (conversion ratio) by dividing par value by the conversion price ($1,000 / $25 = 40 shares). Next, divide the current price of the bond by the conversion ratio. The result is the parity price of the common stock. (1,010 / 40 = $25.25).

When discussing mutual funds with a customer, which of the following statements is not prohibited? A) Buy the shares on record date to receive the dividend. B) The income yield of the fund consists of both dividends and capital gains. C) Get a few friends to join with you to form an investment club, and you may qualify for a breakpoint. D) Buy shares of different funds in the same fund family, and you may qualify for a breakpoint on the total purchase. A mutual fund's expense ratio is calculated by what?

D Explanation Most funds provide a combination privilege, allowing investors to aggregate purchases made in different funds in the same family to qualify for a breakpoint. The income yield of a mutual fund includes dividends only. A group of friends is not eligible for a breakpoint. (Investment clubs are not eligible.) Selling dividends is a prohibited practice because of the immediate tax liability incurred with the dividend and the share price adjustment that results after the dividend distribution. Mutual fund's expense ratio: dividing its expenses by its average annual net assets.

When analyzing a company's balance sheet, you notice that it is using the first in, first out accounting method to value its inventory. This information is most likely shown A) next to the inventory listing in the current assets portion of the balance sheet. B) in a footnote to the balance sheet. C) at the end of the balance sheet in a summary statement required by the SEC. D) on the cover of the balance sheet or at the top of the first page.

D Explanation Notations regarding accounting methods used, such as those for valuing inventory, would generally be found in the footnotes of the balance sheet.

To qualify for favorable tax treatment, real estate investment trusts (REITs) must do all of the following except A) be organized as trusts. B) invest at least 75% of their assets in real estate-related activities. C) distribute at least 90% of their investment income to shareholders. D) pass through losses to shareholders.

D Explanation REITs engage in real estate activities and can qualify for favorable tax treatment if they invest at least 75% of their assets in real estate-related activities and pass through at least 90% of their net investment income to their shareholders. Although they can pass through income, they cannot pass through any losses.

All of the following identify exemptions from the registration statement and prospectus provisions of the Securities Act of 1933 except A) Regulation A. B) Regulation D. C) Rule 147. D) Regulation U.

D Explanation Regulation U regulates loans from lenders other than broker-dealers for the purpose of purchasing securities and is not related to exempt transactions under the Securities Act of 1933.

Which of the following terms are associated with over-the-counter (OTC) trading? Market maker Specialist Auction market Negotiated market A) II and III B) I and III C) II and IV D) I and IV

D Explanation The OTC market is a negotiated market. Within it, market makers are broker-dealer firms that provide a source for stock that customers wish to buy and a repository for stock that customers wish to sell.

One of your clients maintains a traditional IRA with your firm. The individual was born July 20, 1949. This individual's initial required minimum distribution (RMD) from the IRA must be made no later than A) April 1, 2021. B) December 31, 2021. C) December 31, 2022. D) April 1, 2022.

D Explanation The SECURE Act requires any individual born after June 30, 1949, to begin taking RMDs not later than April 1 of the year after turning 72. This client will turn 72 on July 20, 2021, and the next April 1 is in 2022.

Under the USA PATROIT Act of 2001, which of the following must be maintained by financial institutions, such as banks and broker-dealers, to prevent the financing of terrorist operations and money laundering? A) Do-not-call lists B) Specially Designated Nationals and Blocked Persons list C) Privacy notices D) Customer identification programs (CIPs)

D Explanation The USA PATRIOT Act of 2001 requires financial institutions to maintain CIPs to protect against financing terrorist operations or activities and potential money laundering activities. The Office of Foreign Asset Control (OFAC) publishes and maintains the Specially Designated Nationals and Blocked Persons list, which financial institutions use to determine if any customers or potential customers have been identified by OFAC as posing a terroristic threat or are involved in money-laundering activities.

On the same day in a new margin account, a customer buys 1,000 XYZ at $80 and sells short 1,000 ABC at $20. Which statements are true? The margin deposit is $50,000. The margin deposit is $60,000. The minimum maintenance margin requirement is $25,000. The minimum maintenance margin requirement is $26,000. A) II and III B) I and III C) II and IV D) I and IV

D Explanation The customer must put up 50% on both the purchase and short sale. That results in a margin deposit of $50,000. Buying 1,000 shares at $80 per share is a purchase of $80,000. The initial margin requirement of 50% is $40,000. The short sale of 1,000 shares at $20 per share requires 50% of the $20,000 proceeds, or $10,000. Combining those two results in a margin deposit of $50,000. The maintenance requirement on the long position is 25% of the current market value (25% × $80,000 = $20,000). The maintenance requirement on the short position is 30% of the current market value (30% × $20,000 = $6,000). Those two total $26,000.

ABC Corporation has an outstanding 8% convertible bond that is callable at 102. Currently, the bond is trading at 101. The conversion price is $40, and the common stock is currently trading at $39.50. ABC announces a call at 102. To realize the greatest profit, a bondholder should A) convert the bonds into common and sell the converted shares. B) continue to hold the bonds and receive interest payments. C) sell the bonds at the current market price. D) tender the bonds.

D Explanation The investor would realize the greatest sales proceeds by tendering the bond to the corporation for 102. Selling the bond at its current market value of 101 is not an attractive option. Converting the bond to common stock would result in 25 shares ($1,000 par converted at $40 = 25 shares) sold at $39.50 per share ($39.50 × 25 = $987.50). Once the call date passes, the issuer ceases interest payments making it unattractive to continue to hold the bonds.

The locate requirement of Regulation SHO for short sales does not apply to A) American depositary receipts traded on the Nasdaq Stock Market. B) over-the-counter equity securities. C) preferred stock traded on the NYSE. D) nonconvertible bonds traded on the NYSE.

D Explanation The locate requirement is applicable to all short sales of equity securities. It is unlikely to be tested, but, just in case, for purposes of this rule, convertible bonds are considered equity securities.

A dealer in U.S. government securities quotes a 5-year Treasury note at 89.12-89.16. In dollars, that represents a spread of A) $0.125. B) $4.00. C) $0.04. D) $1.25.

D Explanation Treasury notes and bonds are quoted in fractions of 32nds. The spread between the bid and the ask is 4/32nds. In simpler terms, that is 1/8th. Each point is $10.00, so this 1/8th of $10.00 is equal to $1.25.

If a customer gives specific instructions to his registered representative to purchase a security that is clearly unsuitable in light of the customer's investment objectives, under FINRA rules, the registered representative A) can only enter the order with the prior approval of a principal. B) can only enter the order if the customer puts his verbal instructions into written form. C) cannot enter the order. D) can enter the order.

D Explanation Under FINRA rules, the representative may execute the trade at the customer's request; the trade ticket should indicate that the order was unsolicited.

A company has reverse split its common stock. The effect on the earnings per share will be A) no effect. B) a decrease. C) none of these. D) an increase.

D Explanation When a reverse split takes place, the number of outstanding shares is reduced. Because the split has no effect on earnings of the company, dividing those earnings by fewer shares will cause an increase to the earnings per share.

Elisha purchased 100 shares of RMBN common stock on June 6, 2019, at $60 per share. On February 11, 2020, RMBN paid shareholders a 20% stock dividend. Elisha sells the shares received as the stock dividend on December 5, 2020, at $55 per share. What are the tax consequences of this trade? A) $100 short-term capital gain B) $100 long-term capital loss C) $100 short-term capital loss D) $100 long-term capital gain

D Explanation When a stock dividend is paid, the cost basis of the shares is adjusted. In this case, Elisha now owns 120 shares and the total cost is still the original $6,000. That makes the adjusted cost basis per share $50 ($6,000 ÷ 120). With the new cost basis of $50 per share, when the sale of those 20 shares takes place at $55 per share, the result is a gain of $100 ($5 per share profit times 20 shares. Alternatively, $1,100 total proceeds [20 shares x $55 per shares] minus $1,000 cost basis [20 shares x $50 per share adjusted cost per share)). Even though these shares were acquired less than 12 months before the sale, their holding period is based on the original purchase date and that is clearly more than 12 months before the sale. That is why it is long term.

Which of the following factors will affect the special memorandum account (SMA) in a long account? Sale of securities in the account Decline in market value of securities Cash deposited by the customers Interest charged on debit balances A) I and IV B) II and IV C) I and II D) I and III

D Explanation Whenever stock is sold, half of the sales proceeds are credited to SMA. Nonrequired cash deposits are credited to SMA in full. SMA only declines when a customer uses it to borrow from the account or to purchase securities; it is not affected by declines in market value or by interest charges.